A Re-examination of the Relationship Between Foreign Capital Flows and Economic Growth in Nigeria

Abstract

The study was carried out to re-examine the relationship between foreign capital flows and economic growth in Nigeria by collecting annual data over the period of 1986 to 2015 from various sources. The study employed a combination of stationary and nonstationary series. Similarly, irrespective of specifications, the study was devoid of a long-run relationship between economic growth and its determinants in Nigeria. Furthermore, owing to absorptive capacity constraints (such as, infrastructural deficit, underdeveloped local financial market and negative and/or very weak positive spill-over effect on domestic investment), net FDI inflows exerted positive short-run influence on growth, while net portfolio flows and net foreign remittance had significant negative short-run effects on growth. Also, lower levels of net foreign aids and net external debt promote growth, while excessive levels of these flows dampen growth. All these imply that the relationship between foreign capital flows and economic growth in Nigeria is both linear and nonlinear. It is therefore recommended that policy makers in Nigeria encourage the inflow of capital that would be beneficial to the nation, in terms of stimulating domestic investment and economic growth. Putting measures in place to develop the nation’s financial sector is also suggested to attract and make efficient use of capital flows in the country.

Keywords: Foreign capital, Economic growth, and Financial crisis